Labour today hit out at the “chaos and confusion” in the Government’s higher education policy in the wake of a report saying there was a £1 billion a year “black hole” at the heart of it. Alamy

Labour today hit out at the “chaos and confusion” in the Government’s higher education policy in the wake of a report saying there was a £1bn-a-year “black hole” at the heart of it.

A report by the Higher Education Policy Institute, a highly respected think-tank, says the Government has "seriously understated" the cost of its higher education reforms, means the Government's new £9,000 fees regime is in danger of costing taxpayers more than the old system.

As a result, ministers will have to consider drastic cuts in student numbers or ask graduates to make higher repayments.

“Ministers’ justification that fees had to rise has now completely unravelled as experts such as HEPI have shown that the new system will cost taxpayers more now and in the future.

“This shambolic and out of touch policy has now been exposed as both costly and damaging and today’s report further calls in question ministers’ credibility.”

The findings are deeply embarrassing for the Government, but particularly for the Deputy Prime Minister, Nick Clegg, and the Liberal Democrats, who ditched their election pledge to oppose rises in fees on the grounds that they were supporting an austerity programme.

Bahram Bekhradnia, Hepi's director, warned of "serious consequences" for the higher education sector. "Either future taxpayers will need to pay more, other parts of the higher education budget will need to be cut, student numbers will need to be held down even further than presently planned or former students will have to repay more," he said. Last night students and lecturers' leaders said the findings showed the Government's higher education policy was "in tatters".

The Hepi report focuses on two key areas where it says civil servants have made "highly uncertain and optimistic assumptions" on funding. Firstly, it cites the assumption that the average net fee charged by universities would be £7,500 a year – the true figure is nearer to £8,300, thus forcing students to borrow more.

Secondly, it calls into question the assumption that the average male graduate will be earning £75,000 a year in 30 years, the period by which loans have to be repaid. This is already a reduction from an earlier estimate of £100,000 a year.

The latest calculations from the Department for Business, Innovation and Skills (BIS) estimate the shortfall in loans recovery will be around 32 per cent. Analysis from the Institute for Fiscal Studies (IFS) suggests it is nearer 37 per cent.

"The Coalition got their sums badly wrong and have left a mess that will take years to fix," said Liam Burns, president of the National Union of Students.

Sally Hunt, general secretary of the University and College Union, added: "We warned at the time that fees close to £9,000 a year would be the norm and that the calculations for repayment by graduates were flawed. We take little pleasure in being correct, but it is clear now that forcing the burden of paying for university education on to students was an ideological move not a financial one."

Hepi also warns that salary increases among graduates are unlikely to be evenly spread across all sectors of employment. "Over the past 30 years highest-earning graduates have increased their salaries very substantially whereas those earning the median or less have had very much more modest increases, if any at all," says the report. "If low earners increase their incomes by less than high earners as has happened in the past, then this seriously impacts on the repayments that the Government will receive."

The higher fees regime also adds 0.2 percentage points to the Consumer Price Index – thus triggering larger rises in state benefits and civil service pensions of between £420m and £1.14bn a year.

The report acknowledges: "To put a figure on the extent of the shortfall would entail making predictions about what is unpredictable but it is likely to be substantial." However, even using the lowest indicator for the impact of inflation – the IFS' assessment of a 37 per cent shortfall in loans repayment and average loans of £8,000 – the increased cost will be more than £1bn a year, the report says.

"This sort of cost would very largely eliminate the savings that the Government claims its policies will generate of £1.3bn a year," it says. "A slightly higher [repayments] cost or a slightly greater inflationary effect than the most optimistic that we have considered here would mean that the present policy is actually more expensive than the one it has replaced."

Black hole: Why the sums are wrong

There are three reasons why the new system will cost at least £1bn-a-year more.

Firstly, the average fee is £8,234, not the £7,500 predicted. This forces students to take out higher loans.

Secondly, the Government estimates that it will not recover 32 per cent of debts. But the IFS reckons this should be 37 per cent because a civil service assessment of future salaries is over-optimistic, meaning more graduates will not have to repay their loans.

Thirdly, the repayments will put 0.2 per cent on the Consumer Price Index – triggering higher benefit payments and pensions.